Whether you are just starting your first job or going to that third one after three years of experience working, it is important to consider a retirement plan. But is 401k worth it? And why does it have to be a 401K?

Many young earners might feel it is too early to think about retirement. But in reality, there is no right time or early time to think about when you will receive your last paycheck. However, you can secure a portion of your future by investing a measly amount in the 401k funds every month.

Many financial advisors follow it as one of the best options for retirement investment. But, if you are still unconvinced about the tax benefits of 401K, I would suggest going through this article. Here, you will learn why 401k is one of the best options for people just starting their careers.

What Is 401(K)?

401(K) is one of the most used and offered retirement investment vehicles to US employees. When the employees sign the documents to contribute to 401(K) plans managed by their employers, a portion of their paycheck is periodically contributed to that said fund.

This money goes into different investment channels like Mutual funds, bonds, and ETFs, and the capital gain the employee earns through these funds grows as tax-deferred money.

This means that the account holder will not pay taxes on that cash until someone wishes to withdraw it. They can only withdraw the money when they are 59 years and six months old. However, they can withdraw the money before as well. But for that, they have to pay a penalty. You can read our 101 guide to 401k and learn more about the same.

But is 401k worth it? Go through the benefits of investing in this investment plan to know about its worth to an employee.

Why Is 401k Worth It?

No, in reality, there are no massive tax benefits to investing or putting your money in 401(K) investment funds. However, some minor tax benefits and more benefits will be helpful in the long run. Below are several features that an investor can benefit from after they sign up for 401(K) tax.

1. Tax-Deferred Retirement Contributions

Through 401(K) Contributions, you can put away your pre-tax money in the fund. The money you put away does not count against your taxable income. This potentially puts you in a lower tax bracket. This will allow you to face smaller tax bills.

Also, the money you put away in your 401(k) account will grow as a tax-deferred investment. This also includes the amount you make on that money, such as your capital gains. Yes, when you withdraw the money, there will be a certain amount in tax that you have to pay. But, if you fulfill the conditions, there are also ways to avoid taxes and the penalty for early withdrawal.

2. Matching Contribution

Some employers also contribute to the employee’s 401(K) fund alongside the amount the employee is already putting away. They match the employee’s contribution to a specific cap. One of the common matching contributions includes the employer matching up 50% of the first 6% of the employee’s contribution to the 401(K) account.

Some employers also go by a dollar-for-dollar method. This means that they will contribute the same amount the employee is contributing to the fund. In the end, the employees will have to double the amount they contribute to their 401(K). So, Is 401k Worth It? You tell me!

3. Automatic Savings Option

You do not have to worry about managing your money with a 401(K) contribution. There is no need to manually calculate and put away your money in different locations during each paycheck. Your company can use automatic payroll deductions for your paycheck and put away the money for their employees into the 401(K) fund.

New hires can save and invest their money into the 401(K) funds right after they are hired and receive their first paycheck.

4. Emergency Benefits

When you want to withdraw your money from the 401k fund, you have to pay a 10% penalty-free for early withdrawal. If you are taking the money out before the age of 59.5 years, you have to pay this 10% penalty on top of all the income tax liabilities.

However, there are emergency situations that help you avoid these penalties and withdraw the money. When workers are laid off or fired after the age of 55, they can avoid the penalty.

The 401(K) withdrawal penalty is also avoidable if the individual in question has any disability during their career. Also, there are opportunities for employers to take loans against their 401(K) plan.

Different Disadvantages?

We can ask the question of whether 401(K) is worth it or not. However, we cannot ask the question ‘Is 401 worth it?’ without considering its disadvantages.

Here are a few disadvantages that you must know –

• 401(K) provides long-term savings and investment opportunities for their employees. This gives limited opportunities for investment.
• The investment plan comes with high fees for record-keeping, management, etc.
• The funds are hard to access for employees before they are 59 years and six months old. But, if the employee fails to follow the withdrawal rule, they have to pay a 10% penalty on top of the income tax.
• The employer’s payment match does seem minimal and nonexistent at some time.

So, Is 401k Worth It?

It totally depends on your income and the type of investment plan you want. If it seems like a more flexible and helpful investment plan, you can go for a 401(K) investment plan. Please go through all the different benefits of using 401(K) investment plans before choosing it as your preferred retirement plan.

I hope that you have found the necessary insight on 401k that you are looking for. Please let us know your perspective about 401k. Thank you for reading this article.

Read Also:

• What Happens To Your 401k When You Leave A Job?
• How To Transfer 401k To New Job? Step By Step Guide
• 401K Loans: Reasons To Borrow, Plus Rules And Regulations